Twitter’s C.E.O., Dick Costolo, Is Set to Exit, Feeling Heat of Criticism

SAN FRANCISCO — After replacing much of Twitter’s top management team last year, Dick Costolo told members of the company’s board that he wanted them to replace him as chief executive, too.

On Thursday, they did just that, announcing that Mr. Costolo will step down July 1 and appointing Jack Dorsey, Twitter’s co-founder and former chief, as interim chief executive while they look for a permanent successor.

Mr. Costolo, a wealthy former entrepreneur who has led Twitter for the last five years, had grown tired of second-guessing by Wall Street, with its focus on the social network’s sluggish user growth and its repeated failures to make its products more appealing. In January, he confided to friends at the Consumer Electronics Show in January that he did not need the aggravation anymore.

Instead of beginning an immediate search for a new chief executive, the board kept him on, encouraging him to build up his management team and lay out a strategy for it to follow.

“There is never, ever the right time to begin a transition like this,” Mr. Costolo told investors in a call to discuss the leadership transition. But “you want to do these things when the org is stable and the product is robust.”

Even as Mr. Costolo and his lieutenants promoted their early progress in reinvigorating the company’s products, criticism of his strategy grew. Last week, one of the company’s biggest shareholders and cheerleaders, Chris Sacca, publicly called for change.

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Asked why he is staying on Twitter’s board after his exit as chief executive, Dick Costolo says that “I love the company.”Published OnJune 12, 2015CreditCreditCNBC

Now Twitter, which has 302 million active users, faces deep questions about the future of its messaging service, which is built around 140-character snippets of text in a world that is increasingly about photos and video.

“The situation at Twitter must be much worse than it appears, as replacing the C.E.O. is such a big step,” said Brian Blau, an analyst with Gartner. “Twitter’s problems are clearly not over, and while Jack Dorsey knows Twitter well, they really should bring in some outside perspective as most of their strategies so far are not working out so well.”

Mr. Dorsey said that Twitter’s board was not seeking a change in strategy or direction for the company as it searched for a new permanent leader. “We do have a great strategy, we do have a great direction, and we do have a great team behind it,” he said in an interview.

Since Twitter’s debut as a public company in 2013, Mr. Costolo has repeatedly failed to meet Wall Street’s high expectations.

His departure is likely to renew speculation that Twitter is an acquisition target for the handful of tech giants that could afford the company, which currently has a market valuation topping $24 billion. In recent weeks, Google has been rumored to be eyeing Twitter, but people with knowledge of the companies said that no deal was in the works.

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Jack Dorsey, the founder and interim chief executive of Twitter, and Dick Costolo, the outgoing chief, comment on whether a takeover plan is in the works.Published OnJune 12, 2015CreditCreditCNBC

The research firm eMarketer estimates that Twitter’s monthly user base will grow 14.1 percent this year, down from 30 percent growth two years ago. By 2019, its worldwide user growth rate will be 6 percent, according to the firm.

Twitter accounted for 3.6 percent of the $19.2 billion mobile Internet ad market in the United States last year, according to eMarketer, while Facebook held an 18.5 percent share and Google dominated with 36.9 percent.

After Mr. Sacca posted his letter, Robert Peck, an analyst at SunTrust Robinson Humphrey, said that if Twitter’s financial results disappointed investors again in July, as they had for the last two quarters, “we think it’s possible that the company may look to make some changes” in leadership.

Twitter said on Thursday that its second-quarter financial results were on track to meet its previous forecasts.

Twitter, founded in 2006, has never been known for its stable management, with a history of plots and counterplots among its founders and early executives.

Mr. Costolo became chief executive in October 2010 in a boardroom coup against Evan Williams, Twitter’s co-founder and then chief executive. Mr. Williams remains on the board and is one of the company’s biggest shareholders. He will be part of a search committee for a new chief executive.

Last year, much of Mr. Costolo’s executive team was fired or resigned as he sought to speed up the company’s pace of product improvements.

Mr. Dorsey, who preceded Mr. Costolo as chief executive, is deeply familiar with the company and its products. He is also the chief executive of Square, a tech start-up he founded in 2009 that specializes in online payments and has its headquarters down the street from Twitter’s San Francisco office building.

This is the second rise to Twitter’s top ranks for Mr. Dorsey. After being ousted as chief executive and replaced by Mr. Williams in 2008, Mr. Dorsey returned to Twitter as executive chairman in 2011 when Mr. Williams himself was pushed out.

But ever since his ouster in 2008, Mr. Dorsey has wanted to return to the helm of Twitter, according to two people with knowledge of his thinking. As chairman during Mr. Costolo’s tenure, Mr. Dorsey has angled to become more prominent in his influence on Twitter’s direction, these people said.

Mr. Dorsey will continue as chief executive of Square and will not be on the search committee for a new Twitter boss.

As rumors swirled around Mr. Costolo, Twitter insiders have divided into camps regarding who should replace him.

Adam Bain, who oversees global revenue and partnerships, is a favorite for the top job among Twitter employees, according to multiple people inside the company. Mr. Bain, a longtime media executive who worked at Fox Interactive Media, has strong relationships with many of Twitter’s media partners.

Outside watchers of the company have looked at Anthony Noto, a former technology banker at Goldman Sachs and Twitter’s current chief financial officer, as another potential candidate for chief executive.

In recent months Mr. Noto has sought a more operational role, according to multiple people inside the company. This year, he was given oversight of Twitter’s marketing efforts, a role that was earlier taken from Gabriel Stricker, Twitter’s chief communications officer.

Mr. Peck, the SunTrust analyst, also suggested as possible candidates Ross Levinsohn, a former interim chief executive of Yahoo, and Mike McCue, the chief executive of Flipboard, a news aggregation service.

“They’ve done a lot of things right, and some things wrong,” said Ben Schachter, an analyst with the Macquarie Group. “The truest thing they’ve said is that Twitter has not lived up to its potential.”

Correction:

An earlier version of this article misstated the location of Twitter’s headquarters in relation to the offices of Square. The companies’ offices are down the street from each other. They are not in the same office building.

Correction:

An article on Friday about the pending exit of Twitter’s chief executive, Dick Costolo, misstated the sequence of events involving the role of a potential successor, Anthony Noto, Twitter’s chief financial officer, who recently assumed oversight of marketing at Twitter. While the marketing job had been held at one time by Gabriel Stricker, Twitter’s chief communications officer, Mr. Noto did not directly succeed Mr. Stricker.

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